Can a Bank being a Secured Creditor participate in Auction Sale of the Secured Assets? – Kola Janata Commercial Co-operative Bank Ltd. Vs. M/s. Sharad Automobiles – Bombay High Court
July 3, 2023
In this case, the auction held in which four bidders including the bank participated. The bank submitted the highest bid more than the reserve price and was accepted by the AO who conducted the auction and the sale certificate was executed and registered by the AO in favour of the bank. The averment in the petition is that the bank participated in the auction through the AO.
Hon’ble High Court held that (i) the language of Rule 59 of the Second Schedule: "Procedure for Recovery of Tax" of The Income Tax Act, 1961 admits of no other understanding or interpretation than that the normal rule is that the secured creditor is prohibited from participating in the auction and an exception is made if the auction does not materialise for want of bid higher than the reserve price. (ii) The legislative amendment by Act 1 of 2013 which introduces Section 13(5-A) in the SARFAESI Act is clarificatory and restates the position crystallized by Rule 17 and Rule 59 of Schedule II of the IT Rules. (iii) In our considered view, the fact that the auction sale conducted under the SARFAESI Act need not pass the muster of confirmation by Court or Tribunal, renders it all the more imperative that the provisions of the SARFAESI Act and the Security Interest Rules must be strictly observed. (iv) The participation of the secured creditor in the auction renders the auction sale, if not null and void, voidable at the option of the borrower. (v) The statutory scheme is that the AO shall obtain the valuation of the secured asset from an approved valuer and thereafter fix the reserve price in consultation with the secured creditor. The valuation of the secured creditor must be the market valuation. The reserve price may, however, be lesser than the market valuation. In the auction sale, the secured asset may not necessarily fetch the market price. The perception and the judgment of the prospective purchaser may be influenced by several factors, which cannot be placed in straight jacket.
